National Bank The demand for power has brought increased investor interest in renewables companies, according to National Bank Financial analyst Rupert Merer, who predicts “growth ahead in Canada and globally, with data centres, electrification and more.”
“Interest in the IPPs [independent power producers is recovering, with an improving outlook for growth and with rising costs and bond yields now in the rear-view mirror,” he saId. “Power demand in North America could double over the next 25 years, backed by data centre demand, electrification, reshoring of manufacturing and population growth. With this and a market push to green power, the sector has a long runway. IPPs with exposure to the Canadian market are well positioned, as the market seems to have less competition (so far) and should benefit from a 30-per-cent Canadian ITC [investment tax credit].
“Recently, NPI, BEP, INE and BLX have done well in RFPs in Ontario and Quebec for wind power and battery capacity (there are more to come). In the U.S., Brookfield has had success securing 10.5 GW of growth to support Microsoft and AY continues to grow its development pipeline, showing a path to competitiveness in that market too. PIF could soon announce M&A in less competitive LatAm markets and ARR sees a large pipeline of investment opportunities for its unique royalty model. With the operating scale and strong relationships that the companies have in respective target markets, they should find success.”
In a research report released Tuesday, Mr. Merer emphasized valuations are picking up, however he thinks the sector remains “attractive” and sees an increased likelihood of rising M&A activity.
“The IPPs have performed poorly over the last couple of years, with headwinds from higher bond yields, inflation and uncooperative weather,” he said. “Valuations are now improving, but remain below fair value, in our view. M&A in the sector could start to pick-up soon and asset recycling should be more commonly used to fund growth. There are large asset packages that could sell (like AQN and AY), and growth through acquisition is possible across the sector. We estimate an average implied cost of equity at about 10.8 per cent, which is down from recent highs, but still high relative to historical levels and relative to the market.”
Given “renewed support” for IPP in the market “with a growing consensus around the potential for growth in power demand over the next 25 years,” Mr. Merer thinks power demand should be “largely supported by renewables (with natural gas and nuclear too) and offers a strong investment opportunity for the infrastructure sector.”
“With less concern for rising rates and an improved growth outlook, investor perceptions of risk have come down,” he added.
Accordingly, after reducing his target discount rate for companies in his coverage universe, the analyst sees the potential for attractive returns with several catalysts on the horizon.
“With a 12-month forecast for the U.S. and Canadian 10-yr bond yields at 4.0 per cent and 3.2 per cent respectively and a lower MRP forecast (now 4.5 per cent, was 5.0 per cent), we have raised targets,” he said. “The sector could have a few catalysts soon, including asset sell-downs, M&A and the passage of a Canadian ITC for renewable power infrastructure. We believe the stocks have upside with increasing confidence in the outlook for growth and recovering valuations. Our top picks on return to target are INE, NPI, PIF and BLX.”
His target adjustments are:
- Boralex Inc. ( “outperform”) to $43 from $41. Average: $38.90.